Saturday, February 28, 2009

Bill Moyers Talks to Robert Johnson

ROBERT JOHNSON: People talk of nationalization. I just call it restructuring. Restructuring is a part of capitalism. That's how the airlines get restructured when they go through bankruptcy. How you might have to deal with the auto industry, how you deal with venture capital projects. Do the same thing with the banks....Well, I think the notion of nationalization has been a little bit of a PR spin. Restructuring is what you do as capitalist economies to maintain function and continuity. Nationalization invokes the specter of the state seizing the means of production, like Che Guevara is about to take over or something. ...Well, what I think they need to do is inspect them thoroughly, examine, mark down the assets to a conservative level that protects the taxpayer. See the resulting deficit on the balance sheet, which is the hole.

Then the government injects the capital. People continue to operate the banks. People who continue to work there then perhaps sign new contracts with the government. And the government just becomes the stockholder until such time that they sell the stock back to the market and get paid back a little bit for all the lost support that they're creating for these banks.

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BILL MOYERS: Well, FEMA's a pretty unsettling model.

ROBERT JOHNSON: Yes, it is. But I would say you could work with Tim Geithner, who's quite a competent man, working with the existing Citibank management, with just a different set of stockholders. The one danger you have, when you keep these banks open, when they're insolvent, is they have a temptation to very risky activity.Sort of like a quarterback throwing the Hail Mary pass. The losses on an interception accrue to the taxpayers. And the touchdown is kept by the stockholders. So if they take excessive risk in those times they can actually endanger the stockholders further. The plan that Geithner and the White House, the Obama administration, is adopting right now, which I will call intravenous drip capitalization, is one of forbearance. Meaning, don't realize the losses on the balance sheet now. Don't account for everything in a prompt way. Don't truncate the losses, but allow them to go on. And the danger is the ditch could get deeper and deeper.

BILL MOYERS: What's the most discouraging thing you've seen about the Obama plan?

ROBERT JOHNSON: I think the capital assistance program is warehousing zombie banks and running the risk of the taxpayer over the next one or two years, will experience much larger losses.

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BILL MOYERS: And so the government would step in and do what?

ROBERT JOHNSON: I would ask for letters of resignation from the top executives of all the major banks. I would not do a case by case restructuring. I would take the largest group all in and say, "I want everybody's letter for resignation."

You might not honor all those letters, but you'd have them. I would then say, "The stock is worth zero. The balance sheet is too far negative to continue risking the taxpayer's money." The examiners, somewhat like FDR did in a bank holiday, would examine the depth of the hole in those balance sheets.

Fill that hole with money, taxpayer's money, to recapitalize. Send them back out into the marketplace where people know they're wholly capitalized. And last thing I would do is I would separate the toxic assets from the bank that you put back in the marketplace.

So everybody knew the resulting creature was sound and confidence could rebuild. Inner bank credit could start to flow again, 'cause they aren't afraid of each other.

BILL MOYERS: But the question is would that resulting system of financial institutions, separated from the bad assets, recapitalized for the medium term, create new credit flows?

ROBERT JOHNSON: Give people confidence that there was fair play. That the economy and the financial system, I would say, was subject to the same discipline as the rest of us. There's an old saying about you don't ever want to walk under a guillotine, but after the blade falls, you can walk over it. Well after the blade falls people just start walking forward again. But they don't want to be walking under it.

BILL MOYERS: You're saying that the blade should fall, on the management of these banks, and the shareholders who went along with this excessive risk taking, because they wanted the big returns. The blade should fall on them. Get them out of the way. Government restructures. And then offers the banks back into the market and new investors come in.

ROBERT JOHNSON: That's correct.

BILL MOYERS: So the people pay the price who bet wrong, right?

ROBERT JOHNSON: That's correct. I think that's very fair. I think that's how markets are constructed.